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Financial Counsel Blog

im Eccleston is proud to present his new blog, including downloadable podcasts that you can listen to anytime! Make sure to drop a line to Jim in the comments section and keep the discussion going.
(Click here for more....)

Retirement Portfolio Durability

urability: toughness, strength, resilience, stability. Building a tough, strong, resilient, and stable retirement portfolio is, very simply, what every retiree wants. Let's examine in greater depth one of these desired attributes, namely stability. In order to achieve "stability", a client may want to park their retirement portfolio entirely (or largely) in cash. This article may help you help them reconsider. (Click here for more....)

Market Cycle Investment Management

hatever happened to the Stock Market Cycle; the Interest Rate Cycle; Baby Jane? How did Wall Street get away with pushing these facts of financial life down the basement stairs? Most investors, I'm beginning to believe, and all financial advisors, media representatives, and market gurus have abandoned these fascinating curves for the comfort of a straight-edged twelve-month playing field… simple, yes; realistic, not. I have to wonder if things would be different with a more investor-friendly tax-code, but that would be far less lucrative for The Wizards… (Click here for more....)

Alliance Bernstein:

Commercial Real Estate: From the Ground Up

onors — typically parents and grandparents — have made Section 529 plans a vehicle of choice for funding the costs of higher education. And indeed the plans offer many advantages for both beneficiaries and their families. Like most investments, however, 529 plans are complex and need to be evaluated within the context of a donor family’s full array of financial goals. (Click here for more....)

Perspectives on American Depository Receipts (ADRs)

.S. stock markets have not kept pace with inflation thus far in the 21st Century, having earned 3% per year for the 7.3 years ending 4/30/07, while inflation has averaged 3.5%. At the same time, non-U.S., or foreign, markets have performed quite well, earning 9% per year, or 3 times the return on U.S. stocks. American Depository Receipts (ADRs) have also outperformed the U.S. stock market although they have not fared as well as the total foreign market, earning 5% per year, which is almost double the U.S return. These advantages have not gone unnoticed. U.S. investors have intensified their interest in investing outside the U.S. (Click here for more....)

Market Commentary

he Market Commentary provides major security markets' historical data. It is within these markets, Neuberger Berman manages investments. (Click here for more....)

The Presumption of Death

hat happens to the estate of someone who is missing? When will a missing person be presumed dead for legal purposes? What happens if a person who has been legally declared dead then returns? The recent declaration of death for adventurer Steve Fossett helps illustrate some of these issues. (Click here for more....)

SIFMA Research Report

e are pleased to present the latest Securities Industry and Financial Markets Association (SIFMA) Research Report. In this month's issue you will find interesting and useful information on:

The Street, the City and the State: The Securities Industry’s Importance to New York City and State
By: Paul Rainy and Kyle Brandon
(Click here to read this month's issue)

(Reprinted by permission of the publisher, Securities Industry and Financial Markets Association, www.sifma.org, Copyright© 2008 Securities Industry and Financial Markets Association, ISSN 1532-6667.)

DePaul Advisor

hortly before his death in 2006, Moses Burg signed two letters indicating his intention to leave $100,000 to the Anti-Defamation League Foundation in his will. Burg met with an attorney who drafted a trust, but it was never signed. The probate court determined that the letters were not testamentary instruments. The ADLF argued that the elements of a valid gift – donative intent, delivery and acceptance – had been met. The organization also claimed that Burg’s pledge was enforceable as a contractual obligation under the promissory estoppel doctrine. (Click here for more....)

"Selling Away"; A Primer for Investors and Their Attorneys

rokerage firm clients sometimes lose money in investments that have been "sold away" from their brokerage firm. That is, while the brokerage firm adviser indeed has sold the investment to the client, the brokerage firm has not sold it, has not approved of the sale, and likely does not even know of the sale. Such "outside" investments often are the most egregious frauds and schemes. (Click here for more....)

New Handbook Outlines Prudent Practices for Fiduciary Advisers

he Financial Planning Association (FPA) has published a handbook containing practice guidelines for "Fiduciary Advisers" as that term is defined in the Pension Protection Act of 2006. The FPA states that the handbook "represents a standard of excellence for fiduciary advisers." As such, it is a must-read for anyone providing investment advice to pension plan participants or beneficiaries with respect to plan assets for fees or other compensation, including those fiduciary advisers employed by trust departments, insurance companies, brokerage firms, registered investment advisers and any agents or affiliates. (Click here for more....)

Fiduciary Focus: The Ideal Advisor to Retirement Plan Fiduciaries

number of readers of this column have, over the years, asked me how I would describe the ideal investment advisor to fiduciaries of retirement plans. This month's column is an extended explanation of what I tell them. (Click here for more....)

DiMeo Schneider & Associates, LLC: April 2008: "A Better Target Date Fund (The 'Better Mousetrap')"

arget date funds are part of a major paradigm shift in how participants invest in 401(k) plans. According to a recent Hewitt study, 57% of plan sponsors currently offer target date funds. Moreover, the Pension Protection Act’s establishment of target date funds as a QDIA ( Qualified Default Investment Alternative) should accelerate their use by plan sponsors and participants. (Click here for more....)

Hedge Fund Industry Announces New Guidelines, Including Checklist for Developing Compliance Manual

he Managed Funds Association ("MFA") has published new guidelines entitled, "Sound Practices for Hedge Fund Managers." As the hedge fund industry's main trade group, the MFA seeks to raise "the standards across the board" — in all of the principal areas of hedge fund investing, management, operations and compliance. Along those lines, the MFA has prepared a checklist for hedge fund managers to consider in developing a compliance manual. Let's examine the more important aspects of that checklist. (Click here for more....)

Finding the Sharpshooters of
Target Date Lifecycle Funds

he Department of Labor’s (DOL's) new rules for Qualified Default Investment Options (QDIAs) advance three investment options: Target Date Funds, Balanced Funds and Managed Accounts. “Managed Accounts” in this context means that a service provider creates diversified portfolios of the plan’s mutual funds (and/or other offerings) on behalf of the participants. Managed accounts hold the most promise for advisors but they require adherence to an audited prudent investment process, a process that could take years to achieve scale. Thus, Target Date Funds (TDFs) are the immediate play. (Click here for more....)

Alliance Bernstein:

Saving for College: Putting 529 Plans to the Test

onors — typically parents and grandparents — have made Section 529 plans a vehicle of choice for funding the costs of higher education. And indeed the plans offer many advantages for both beneficiaries and their families. Like most investments, however, 529 plans are complex and need to be evaluated within the context of a donor family’s full array of financial goals. (Click here for more....)

The Blob Comes to Investment Manager Due Diligence: Invasion of the Sneaky Peer Group Bias

here are many biases in peer groups, some of which can be controlled. But one obscure bias just won’t go away, and it’s raising havoc with investment manager evaluations. It crawls out from compromises that all peer group providers must make, and invades evaluators’ cerebellums, unbeknownst to its unwitting victims. This sneaky perpetrator is called classification bias. Note it well. (Click here for more....)

A Knight's Tale

ike a knight's quest from days of yore, the trustee of the William J. Rudkin Testamentary Trust has battled the Commissioner of the IRS from the Tax Court to the Second Circuit Court of Appeals and on to the highest court in the land. The United States Supreme Court has ruled that the investment advice received by a trust is subject to the 2% threshold to be deductible. The trustee's name was Knight, and the case of Knight v. Commissioner has come to an end. (Click here for more....)

Balanced or Target Date: Two Good Choices

he Pension Protection Act of 2006 sets forth three options for QDIAs (Qualified Default Investment Alternative). They include target date (or life cycle) funds, balanced funds, and managed accounts. In all likelihood, target date funds will become the dominant auto-enrollment default option in tax deferred retirement plans. Nevertheless, balanced funds will also be selected by many investors. Therefore, this study evaluates the historical performance of a balanced fund approach and a target date allocation model using data from the past 48 years. (Click here for more....)

Fiduciary Focus: Providing Value to Sponsors of Retirement Plans

he Pension Protection Act, signed into law by President Bush in August 2006, provides safe harbors for the sponsor of a qualified retirement plan if the sponsor follows the necessary procedures to implement the limited protections of section 404(c) of the Employee Retirement Income Security Act of 1974 and a qualified default investment alternative. (Click here for more....)

How to Buy Individual Bonds: A Fixed-Income Toolkit

nce you’ve learned about bond basics and reviewed the vast number of bond choices, you’re ready to make decisions on how to invest your funds in bonds. Basically, you have two choices: You can purchase individual bonds, or buy them packaged together as funds. Both choices offer certain advantages. (Click here for more....)

DiMeo Schneider & Associates, LLC:
January 2008 Market Commentary

.S. and overseas equity markets moved lower in January as credit concerns lingered. The Federal Reserve cut interest rates twice in nine days from 4.25% to 3% and lawmakers scrambled to put in place a fiscal stimulus plan amid concerns the U.S. economy was entering into a recession. (Click here for more....)

Securities Regulator Provides Guidance Regarding the Review and Supervision of Electronic Communications

INRA (the Financial Industry Regulatory Authority) has issued Regulatory Notice 07-59 relating to electronic communications, such as email, instant messaging, text messaging, weblogs and podcasting, which financial services firms and their employees may use to conduct business. Let's examine the key points of the notice. (Click here for more....)

Alliance Bernstein:

Discovering Innovation: Insights from Early Stage Growth Research

echnological change is rapidly transforming an array of multibillion dollar industries. Our Early Stage Growth team has mapped out the investment implications of 11 important developments in life sciences, information technology and alternative energy, analyzing innovations that could affect major markets and billions of people around the world. (Click here for more....)

Alliance Bernstein:

If It Feels So Right ... How Can It Be So Wrong?

aedalus warned his impetuous son, Icarus, to travel between the extremes, and that's also good advice for investors — but difficult to heed. Think back to May and June of 2006 when, after a four-year run, it suddenly seemed like the bottom was dropping out of the stock market. Over a 36-day period, US stocks fell by 7%, major foreign markets stocks by more than twice as much, and emerging markets shares even more steeply. A brutal bear market seemed to be gaining traction — and investors were anxious. (Click here for more....)

Senior Consultant

The State of the Advisory Services Industry

QUESTION: What is the state of the advisory services industry?

WINKS: For the first time ever, a distinction has been drawn between commission sales and advisory services. On March 30, 2007 the DC Court of Appeals settled who can provide investment advice, how they can be paid and what standard of care they can use. The DC Court of Appeals ruling in the FPA’s suit of theSEC has ended a six year controversy over what has been called the Merrill Lynch Rule. Since 1999 the SEC has allowed brokers to use fee based compensation without being regulated as investment advisors. (Click here to read this month's issue)

Securities Regulators Reveal Widespread Compliance Deficiencies On the Part of Investment Advisers

he North American Securities Administrators Association ("NASAA") has released a report that details significant compliance deficiencies among investment advisers nationwide and in Canada, and outlines a set of recommended best practices to avoid those compliance deficiencies. Let's highlight the key compliance deficiencies and the recommended best practices. (Click here for more....)

Pure Target Indexes: Better Benchmarks for Target Date Funds

arget date funds are here to stay. As a result of the Pension Protection Act of 2006, target date funds will likely become the dominant auto-enrollment default option in tax deferred retirement plans. The potential growth in assets committed to target date funds over the next 5-10 years is astounding. For example, at year-end 2006, there were 168 distinct target date mutual funds with $109 billion in total assets (if counting all share classes, the total number of funds was over 1,200). As of October 31, 2007 (Table 1) there were 226 target date funds with $164 billion in assets. This represents a 35% increase in the number of funds and a 50% increase in total target date fund assets in just 10 months. (Click here for more....)

The Promise of Target Date Funds

arget date funds, often called lifecycle funds, or target maturity funds, offer a terrific solution to one of the most serious problems facing America’s retirement system; that of individuals being responsible for the investment decisions upon which hang much of the success or failure of the nation’s retirement. (Click here for more....)

Qualified Pension Plan Participants Should Look Forward to Receiving Specific Investment Advice

he Pension Protection Act of 2006 (the "PPA") should benefit plan participants (and beneficiaries) by providing participant education. Under the PPA, qualified "Fiduciary Advisers" will help plan participants navigate through their investment selection and allocation decisions. Although we await the issuance of regulations by the Department of Labor to amplify the provisions of the PPA, let's review the PPA and what plan participants may expect to receive by way of guidance. (Click here for more....)

Securities Regulator Makes Protection of Senior/Retiree Investors A High Priority

enior investors, as well as Baby Boomers who are retired or who are approaching retirement, should take some comfort from a recent notice to financial services firms, Regulatory Notice 07-43. The Financial Industry Regulatory Authority (FINRA) states that the purpose of the notice is "to urge firms to review and, when appropriate, enhance their policies and procedures for complying with FINRA sales practice rules, as well as other applicable laws, regulations and ethical principles, in light of the special issues that are common to many senior investors." (Click here for more....)

Pedaling Lifecycle Funds: Balancing the Uphill Climb to Riches with the Downhill Need to Keep Them

everal of you have called and e-mailed me over the past couple months, urging me to jump into the vacuum left by the lack of benchmarks for target date lifecycle funds. Thanks to your urging I’m in the game, and have teamed up with top professionals to form Target Date Analytics (TDA). Our mission is to develop standards for understanding and evaluating target date lifecycle funds. My partners in this endeavor are Dr. Craig Israelsen, a professor at Brigham Young University who has written extensively about his groundbreaking research on indexes and benchmarks, and Joe Nagengast, author of 2 comprehensive studies on target date funds called “Popping the Hood.” (Click here for more....)

Getting to the Core of Model Portfolios

odel portfolios are being touted as the investment industry’s newest and best solution. Investment managers submit their models to broker sponsors who then package these style and asset classes into various diversified programs, tailored to investors with varying risk appetites. Despite all the hoopla, these programs could stand improvement, and certainly will evolve. For example, one area that has gone unnoticed is “core”, defined as the stuff in the middle between value and growth. Most model portfolio programs acknowledge a middle range in company size by employing large, middle and small capitalization managers. But none realize that there is a similar middle in styles: there is a core in between value and growth. Ignoring this core leads to poor diversification and the consequent exposure to poor performance. (Click here for more....)

The Monitor

Risk Management Roundtable
The Monitor asked three experts for their insights on managing risk.

Taking Stock of Correlation Risk
An asset allocation policy established with low-correlation expectations now functions in a high-correlation environment. The author discusses why spread and spread volatility more thoroughly illustrate the nature and magnitude of multi-asset risk than correlation alone.

Overlay Management in the Separate Account World
Technology is one of the largest influences on the evolution of the separately managed account industry; overlay managers are the next step. This article discusses how advisors can help their clients achieve the right blend of alpha while dealing with the realities of taxes and individual restrictions using an overlay manager.

Monte Carlo Simulators: Are They Worth the Gamble?
Monte Carlo simulators forecast portfolio asset values by adding random fluctuations to a steady growth. The author explains three key constraints of Monte Carlo models, why you should be aware of them, and why using better models or actual market history will help forecast portfolio growth.

The Role and Responsibility of a Chief Compliance Officer
A firm's compliance program must be integrated into every level and function of the organization. This article discusses the role and responsibility of the chief compliance officer with regard to fostering a culture of compliance.

(Click here to read this month's issue)

Prudent 72(t) Retirement Planning Requires More Than Just Wishful Thinking

dvisers, and their clients, have been warned about "early retirement investment pitches that promise too much." A FINRA Investor Alert has cautioned employees to "look before you leave", and two well-publicized regulatory actions have highlighted problems with misleading sales practices and ineffective supervision. Let's review the warnings, and provide guidance to advisers on how best to stay clear of trouble. (Click here for more....)

SEC Approves Rule Increasing Protection for Deferred Variable Annuity Investors

he Securities and Exchange Commission (SEC) recently approved a controversial rule proposal that will add significant protections for investors purchasing or exchanging deferred variable annuities. Deferred variable annuities are life insurance annuity contracts whose value fluctuates over time, and whose income is not received immediately but delayed to a future date. The deferred variable annuity rule imposes new requirements on financial services firms in four areas. The areas are: suitability; review and approval by a principal of the financial services firm; supervisory and compliance procedures; and training of financial advisers. (Click here for more....)

The Unsettled State of the Life Settlement Market

s your old, tired, life insurance policy actually worth something more than simply its surrender value? That's what the life settlement market, as it has evolved, would have many older policyholders believe. At first glance, it would appear that the development of a secondary market for insurance policies would offer policyowners a competitive alternative for raising cash rather than simply cashing out their insurance policies at the policy's surrender value. (Click here for more....)

Subprime Mortgage Problems: What to Look For and Where to Look

ubprime mortgage problems are much in the news these days. Some subprime mortgages originate with standard underwriting and documentation procedures. They are subprime because the borrowers’ credit quality is poor, the loan-to-value ratio is high, or for some other reason that impairs creditworthiness. Other subprime categories are ‘low doc’, ‘no doc’, and ’pure schlock’, which means that the documentation and underwriting of the mortgages are substandard, nonexistent, or potentially fraudulent. (Click here for more....)

Securities Regulator Issues Important Guidance For Newly-Registered Investment Advisers

he Securities and Exchange Commission (SEC) has published a "plain English" summary of the law to help new advisers understand their compliance responsibilities. This publication is part of a broader effort to communicate to investment advisers that they have certain critical obligations, and that the SEC will ensure compliance with those obligations through routinely examining investment advisers, issuing deficiency letters to them and, if necessary, bringing enforcement actions against them. Let's highlight the key sections of this latest SEC guidance. (Click here for more....)

Fair Labor Standards Act Litigation Fallout; The Effect (So Far) of Broker Overtime and Improper Expense Deduction Complaints

t started with, "Huh - brokers should be paid overtime?" Fast forward, Smith Barney and UBS have settled nationally (for $98 million and $89 million, respectively), Merrill Lynch has announced a national settlement (for as yet an undisclosed sum, but having already agreed to pay $37 million to settle in California), and Morgan Stanley has settled in California (for $42.5 million). (Click here for more....)

Advocate Charitable Foundation Advisor Update

atest Rulings From the Courts and the IRS:
IRS Denies Request to Modify NIMCRUT to Standard CRUT Based on Change in Circumstances, Letter Ruling 200649027
In these facts, the trustees (who were also the income beneficiaries) of a net income with makeup charitable remainder unitrust (NIMCRUT) received court approval to reform the NIMCRUT to a standard charitable remainder trust (CRUT) subject to an IRS determination that such modification would not disqualify the trust. The request was based on two arguments: 1) the attorney who drafted the document failed to fully compare the benefits and downsides of a NIMCRUT to a CRUT, and 2) investment market downturns dramatically reduced the trust’s accounting income, frustrating the trust’s goal of providing “suitable annual income” to the beneficiaries. The IRS denied the request, stating only a request based on scrivener’s error would avoid disqualification, and ruling the proposed change based on the reasons cited would disqualify the trust as a charitable remainder trust. (Click here for more....)